Treasury’s Jack Lew talks yuan, slowing China economy

HuShuli

HuangShan

TangJiajie

ZhangHong

BEIJING (Caixin Online) — U.S. Treasury Secretary Jacob Lew paid his third visit to China since taking office last year in mid-May, two months before this year’s U.S.-China Strategic and Economic Dialogue (S&ED) in Beijing.

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During his 40-hour visit to the Chinese capital, Lew met Premier Li Keqiang, Vice Premier Wang Yang and a number of other high-level officials.

At the center of discussions was the yuan exchange rate. Before he departed for China, Lew said he would press Chinese officials for a more market-oriented exchange rate, adding there had been “negative movement” in recent months.

Since the beginning of this year, the yuan
USDCNY, -0.1310%USDCNH, +0.0506%
has dropped about 2.8% against the U.S. dollar, despite the face the central bank in March doubled the trading band for the yuan to 2% in an attempt to foster more volatility.

On April 15, the U.S. Treasury Department said China was not guilty of currency manipulation in its semiannual currency report but still criticized the government intervention in the yuan’s value. Lew said during his trip that the yuan still “is undervalued.”

The 59-year-old has spent about seven years in the White House. He previously served as director of the Office of Management and Budget in the Clinton and Obama administrations.

In an exclusive interview with Caixin before he completed his China trip, Lew discussed the upcoming S&ED — talks involving high-level officials on a range of issues — the yuan exchange rate, the fiscal situation of the U.S. and the progress of the Trans-Pacific Partnership (TPP) negotiations.

He also said China should continue with its pace of reforms to achieve longer-term growth momentum. Excerpts of that interview follow.

Caixin: How would you describe your trip to Beijing?

Jacob Lew: I had a successful series of meetings today (May 13), met with the entire economic leadership and covered and very broad range of topics. It’s in preparation for the July Strategic and Economic Dialogue, to lay a foundation so we can really have a successful meeting in July. It’s my third trip to China since becoming Treasury secretary, and I think it’s been important to develop a relationship where we can have frank conversations about issues that are of mutual concern and require candid conversation.

In your testimony last week, you told Congress that your department doesn’t think China is a currency manipulator, but needs to take further steps to liberalize the yuan. What exactly does the department mean by ‘substantial adjustment’?

Well you know, we made clear in our currency report that we continue to think that our analysis shows that the renminbi [yuan] is undervalued, and we’ve seen over the last few months policies that should move to a more market-determined exchange rate, doubling the trading band for example, but all we’ve seen since the trading band has doubled is the depreciation of the renminbi against the dollar.

Reuters

U.S. Treasury Secretary Jack Lew.

And we’ve also seen a continued accumulation of foreign reserves, which is evidence of intervention, and I made the case that if you need to move to a market-determined exchange rate for your own reasons to increase the spending power of the renminbi for the Chinese people and to have a level playing field for international commerce, that it’s legitimate to say that it should be able to adjust up or down.

I think it’s important also that there be more transparency on intervention, that right now we need to look at what the foreign-currency reserves are and figure out the intervention from that. There are rules that are IMF [International Monetary Fund] rules that would provide more clarity and transparency, and I urge that they move toward those.

Is that part of the issue you are going to raise at the S&ED?

Well, I’ve raised these issues consistently in each of my meetings, and must say that early last year it looked like there was more movement toward the renminbi floating up. I think there were some concerns that were legitimate concerns about the one-way direction of the yuan adjustments and the risk that it would become a magnet for speculative investments.

The points I made today and the points we will continue to make, as we build up to the S&ED, is that the yuan is going to have to be able to float with the market if it’s going to move to being a market-determined exchange rate, and that means not intervening if you’re within the band that’s been set.

What do you think of the upcoming S&ED? Do you think any significant breakthroughs will be made?

I think I’ll leave until July what might be breakthrough issues, but the range of issues in terms of market forces becoming more dominant in terms of interest rates and market participation and access to competition are issues where progress can be made.

We’ve worked over the last year on having frank discussions about how to encourage more U.S investment in China and Chinese investment in the U.S, and how to open our markets to free exchange of goods. So I think there are areas of progress that we can continue to make.

One of the things about the S&ED that I think has been real a mark of success is that it tries to identify practical steps where instead of having goals that it takes years to achieve, it identifies what’s the next step you can take to show that you’re making progress toward the goal, and we’ll be having some serious conversations coming out of today’s meetings.

But leading up to the July S&ED, hopefully we’ll make progress on economic issues and also some of the issues that overlap, like climate, and the strategic area as well.

Your last visit to China took place right after the Communist Party’s Third Plenum. Did you see any marked differences over these five months?

Obviously, the first test is that there’s first a commitment to the principles in the Third Plenum, and I would say that in all the meetings I’ve had, I’ve heard a restated commitment to introducing more market forces into the key areas of the economy, and I heard no backing away from the key commitments.

The challenge is implementation and I heard a lot about literally hundreds of separate measures that are seen as implementation steps. ... The complete implementation could take some time, but they have to start making visible progress on the important pieces.

It certainly sounds as if they understand that and they’re working toward that, but five months is a relatively short period of time with a quite substantial work undertaking, and we’ll continue these conversations, and when we’re back here in July, I certainly hopeful that we’ll see those tangible steps.

What’s your main concern about China’s economy?

China is obviously dealing with some short-term challenges in terms of a lower rate of growth. I heard a lot of confidence that can be managed and maintaining a growth rate in the target range. I must say that’s consistent with the analysis that we’ve made as well.

I guess my concern in the economic area is that with short-term economic challenges, there could be a temptation to put off some economic reforms which are key to medium- and long-term economic growth. And I strongly made the case that the challenge is to keep moving ahead to put in place the steps that they need for long-term growth, even while they’re managing the short term.

I think that it’s actually a case of overlapping interests, because it’s important to the U.S and the world economy that China have a strong economic future, and it’s certainly important to China.

How do you assess the impacts of sequester and government shutdown on the U.S economy and the U.S dollar? How will you avoid a future impasse like this?

I think if you look at the actions taken from December of last year until now, you’ve seen a consistent series of steps to try to reduce that level of uncertainty. There’s a two-year budget agreement in place. The debt limit or borrowing authority was extended for a longer period of time than it had been, going well into the middle of next year.

You see several pieces of legislation that have been tied up because of political controversy clear, such as the farm bill which had been very difficult for a number of years. So I think that there’s been a very positive trend which reflects a turning away from the kind of gridlock approach that you’re describing.

I think that if you look at the macroeconomic impact, we’ve seen the brunt of fiscal consolidation absorbed. In the jobs numbers that came out last month, we saw overall public sector hiring slightly growing. It had been going down, either state or local was going down, or federal was going down, but it was a headwind, and I wouldn’t say it was a powerful tailwind in the last couple of months, but it went from being a headwind to a tailwind.

I think realistically, given the budget constraints that we face, it’s not going to be a powerful driver of growth, but it’s a big difference not to be working against growth, which is progress. So, I actually think that if you look at the U.S recovery, as a result of very dramatic actions taken to jump-start the economy, to reform our financial system and then to deal with our deficit after, we’re in much better shape than many other countries, and I think we did it in the right order. We got the economy moving, we restored confidence in the financial system, and we had fiscal consolidation in a politically messy way, but in a way that reflected the right sequence, at least in terms of economics.

You emphasized the importance of safeguarding U.S. leadership in the IMF, and it represents the multilateral approach the Obama administration has been advocating. What is your take on some new initiatives proposed by emerging economies, such as the Asian Infrastructure Investment Bank?

Over the last, post-World War II period, we’ve developed a number of multilateral organizations that are critically important to economic and financial stability. The IMF is a leading one, and we are committed to ratifying the 2010 IMF reforms, but the regional banks and World Bank are very significant multilateral commitments that have established track records of making certain that there are standards in place that are effective in terms of reaching goals, but also making sure that there are appropriate protections.

We look forward to learning more about the proposals that have been coming forward, but I think that questions we would ask are: how do they build on or add to the work being done by the existing multilaterals, and how do they address the concerns of standards that have been well-addressed … and we look forward to learning more about it.

We know that the TPP is still at the top of President Barack Obama’s trade policy agenda. However, TPP talks failed to reach a resolution last year. What are the major obstacles? As for the ministerial talks scheduled for May 19 in Singapore, how optimistic are you that progress will be made?

I’m optimistic about TPP. I don’t know if this meeting will be the meeting where things come together, but we’re steadily making progress.

TPP was a bold new idea to set a high standard and see who would come. We’re obviously seeing a lot of interest in being part of an agreement with a high standard. When you’re talking about high standards, they’re hard. It means that it puts each of the negotiating countries in a place where they have to make hard decisions that might be out of the zone of comfort that they started out with.

I think we’ve made substantial progress, we continue to make progress, and I think the reason is meetings that the president had when he was in Asia contributed to the progress. We now have discussion framed where some of the most difficult issues can be addressed and we can make progress.

One of the things in trade negotiations, really in all negotiations, is the hardest issues don’t get resolved until the end because every party wants to know what every other party is doing, and when you have a multilateral discussion where there’s all these bilateral discussions behind it, it’s quite understandable that it’s a challenging process.

But the trade negotiators are coming back together in just a few days, and we’ll meet again if they need to, and we’re going to keep pressing forward because it’s so much in the interest of the global economy for us to have a successful TPP, and we look forward to it being an open TPP where countries that are prepared to meet the high standard are able to participate.

What do you expect China’s role to be in it?

Well, obviously China has not engaged up till now, but we see it as an open process, where countries that are prepared to accept the high standards of TPP can participate in it.

Can you reach an agreement by the end of this year?

I’m always reluctant to put dates out there, but I’m very optimistic there will be an agreement, and obviously the sooner the better.

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